European Markets: Why 2024 Could Be the Year of Opportunity

The European Stock Market Is Not What You Think

Many Western investors have a mistaken idea about the European markets. They believe that the European stock exchange is a single entity, when in reality it is a complex set of national and regional markets operating under different regulations. From London to Frankfurt, from Paris to Madrid, each stock exchange functions independently. However, they all share something in common: they are interconnected and subject to similar dynamics.

The London Stock Exchange, Euronext, Frankfurt Stock Exchange, and SIX Switzerland are just some of the major markets that make up this ecosystem. Although it may seem that retail investors cannot follow all these exchanges simultaneously, there are tools that make it possible: stock indices.

What is Really Happening in the European Markets?

Currently, the landscape of the European markets is shaped by three key factors that every investor must understand:

Inflation Finally Subsides

European central banks have maintained high interest rates for months. This approach is working: inflation has steadily decreased in almost all of Western Europe. However, there is an important detail: interest rates will remain high longer than many expected, which will continue to pressure the valuations of growth technology companies.

The positive side is that the financial sector benefits from this situation. And when inflation finally stabilizes, we will see significant changes in investment strategies.

The European Economy Faces Uncertainty

PMI manufacturing and services indices in the eurozone and the UK are all below 50, a clear sign of economic weakness. Post-COVID complications and the conflict in Ukraine have created an environment where it is difficult to predict whether Europe will experience a soft or hard landing.

Despite this, there are positive signals suggesting greater resilience than perceived.

The European Labor Market Remains Strong

Here’s the surprise: while interest rates rise, unemployment in the eurozone continues to fall. The rate reached 6.4%, a historic low. Simultaneously, wages are growing at an annual rate of 4.6% in the eurozone, surpassing inflation.

This is crucial to understanding why European markets could be attractive now: a resilient labor market combined with rising real incomes should sustain consumer spending, which in turn could boost stock markets.

The Main European Market Indices You Should Know

To invest in European markets without losing your mind analyzing individual companies, indices are your best allies. They represent the overall performance of multiple companies and serve as underlying assets for futures, options, ETFs, and other financial products.

DAX 40: Germany’s Barometer

It is the benchmark of the German stock market, comprising the 40 largest and most liquid companies listed on Frankfurt Stock Exchange. Companies like Adidas, Siemens, Volkswagen, Deutsche Bank, and Mercedes Benz are part of it.

The DAX 40 is widely followed because it reflects the economic health of Europe’s largest economy. In 2023, it posted a return of 6.82%.

FTSE 100: The UK Indicator

With 100 companies listed on the London Stock Exchange weighted by market capitalization, the FTSE 100 accounts for about 80% of the total value of the LSE. Names like AstraZeneca, Unilever, Vodafone, BP, and Rio Tinto are included.

Its advantages include liquidity and diversification; disadvantages include exposure to currency fluctuations and geopolitical risks. In 2023, it had a negative return of -1.27% due to UK economic weaknesses.

Euro Stoxx 50: The Eurozone Showcase

This top-tier index tracks the performance of the 50 leading companies in the eurozone, covering 11 countries and multiple sectors: banking, energy, technology, and consumer goods. ASML, Airbus, LVMH, TotalEnergies, and Santander are among its prominent components.

Its performance in 2023 was 6.45%, positioning it as a reliable indicator of European economic health.

IBEX 35: Spain’s Strength

The Madrid Stock Exchange’s benchmark index tracks the 35 most liquid companies. BBVA, Inditex, ArcelorMittal, Iberdrola, and Repsol are its main components.

Surprisingly, the IBEX 35 was the best performer among European indices in 2023, with a return of 9.72%, almost matching the US S&P 500.

CAC 40: The French Index

It reflects the performance of the 40 most important stocks on Euronext Paris, including companies like Alstom, BNP Paribas, L’Oreal, Renault, and Stellantis.

In 2023, it posted a return of 5.29%, showing a moderate performance within the European context.

Why Are European Markets Changing?

A crucial observation: Europe does not have a native Apple, Google, Meta, or Netflix. This has led many to dismiss the European markets as an investment opportunity. Nothing could be further from the truth.

Consider ASML, a Dutch company valued at €215.9 billion, which produces advanced semiconductor systems. In an era of chip wars between the US and China, its strategic position is incalculable.

Beyond individual cases, the European markets have undergone a profound sectoral transformation since 2008-2009:

• Information Technology: grew from 2.9% to 6.7% of market share
• Industry: increased from 11.3% to 15.0%
• Healthcare: rose from 9.7% to 16.1%
• Consumer Discretionary: increased from 8.9% to 11.3%

This has occurred at the expense of sectors like finance (from 21.1% to 17.5%), materials (from 11.0% to 6.9%), and energy (from 10.9% to 6.0%).

European Markets vs. US Markets: A Diversification Advantage

Here’s the point many investors overlook: European markets have a much more balanced composition than their US counterparts.

In the US, the technology sector accounts for nearly 30% of the market. In Europe, it reaches just 6.7%. This means that any specific sector crisis will impact Wall Street far more deeply than the old continent.

For investors seeking stability through diversification, this characteristic of European markets is ideal. No sector has disproportionate weight, allowing for more consistent returns.

The Global Reach of European Markets

A surprising fact: nearly 3 out of every 5 euros of revenue from companies listed on the European markets come from outside Europe.

In 2012, 61% of revenues came from within Europe. By 2023, this proportion fell to just 42%. The remaining 58% comes from North America (26%), Emerging Markets including Latin America and Africa (25%), and other regions.

This makes European markets a vehicle for diversified global exposure without leaving the region.

Are Current Valuations in European Markets Attractive?

The analysis of the Price/Earnings ratio (P/E) provides clear answers: 7 of the top 10 sectors in European markets are trading below their 10-year average valuations.

This includes communication services, consumer discretionary, consumer staples, energy, financials, materials, and utilities.

These valuations reflect market pessimism about the European economic slowdown. However, as the region exits the interest rate hike cycle and experiences a soft landing, these valuations could expand significantly.

Geopolitical risks persist: Ukraine remains a point of friction, and now the conflict in the Middle East adds uncertainty to the global oil market. But these risks are already partially reflected in current prices.

What to Expect from European Markets in 2024 and Beyond?

European markets started 2024 in negative territory since late July, with deepening declines in October due to geopolitical tensions. However, the fundamental outlook suggests upcoming positive changes:

• Inflation will continue to decline
• Interest rates will start to decrease in Q2 or Q3 2024
• The labor market will remain strong
• Valuations will continue to be attractive

As Lazard Asset Management concluded: “It is unlikely that Europe’s valuation discount compared to global markets will continue indefinitely. Investors should leave behind previous assumptions about Europe and take a fresh look at the region.”

European markets present a unique set of features: sectoral diversification, global exposure, attractive valuations, and a resilient labor market. For medium- to long-term investors, these conditions could represent an opportunity window that should not be ignored.